When Greg Duffy shopped his business idea around in 2008, investor after investor told him the same thing: you're crazy.

Duffy wanted to build a gadget--an IP camera for home surveillance that's accessed via the cloud--and most startup investors didn't want anything to do with manufacturing. They wanted software, and software only.

Duffy persevered. Today, his company--Dropcam--uploads and processes more video every day than YouTube. This fall he raised $5.8 million, the first big pile of money for his San Francisco company. And while it's still in its early days, Dropcam's traction points to something big going on: the cloud is reshaping gadgets of all sorts, beyond smartphones and tablets.

Dropcam lets you view live video on your phone (click to enlarge).
Dropcam

Just look at what Tony Fadell, who led the development of the iPod and iPhone, has done with Nest, the much-celebrated Wi-Fi-enabled thermostat that let's you can change the temperature of your house from anywhere via your iPhone or iPad.

There are plenty of other examples: Square's payment device piggybacks off the iPhone's connection to let people anywhere take credit cards. TV devices such as Slingbox let people watch shows on their phones that are recorded on their DVRs. And a slew of fitness devices, such as FitBit and Jawbone's Up bracelet, track your physical activity and serve all the data up by syncing with the cloud.

"This is something of a universal shift," said Sameer Gandi, a partner with venture firm Accel Partners who did the investment with Dropcam, which was Accel's first foray into consumer electronics. "We will see a lot of things that make more sense as connected devices and services. It's not Dropcam-specific."

For his part, Duffy is blunt about how important he believes this shift is for all gadget makers: "Any company that's doing consumer electronics and hasn't thought about how the product is accessed from the cloud should probably beware," he said.

Nest, the Wi-Fi-enabled thermostat

The cloud, and the overall service, is what sets Dropcam apart from most rivals. Your home computer is almost secondary. Dropcam subscribers can record and store reams of video without even turning on a PC. You can watch the camera live using any smart phone, and the system sends you alerts via e-mail or text when the camera detects motion.

Gandi said he invested in Dropcam because of this integrated approach, and because the service works with Apple-like simplicity. "Most of the others, you needed to be an MIT engineer to keep it running," he said.

That complexity problem is what led Duffy to create Dropcam in the first place. Well, that and dog poop.

Duffy's father, who lives in Plano, Texas, was looking for ways to figure out which neighbor's dog was pooping in his yard, and so he started hooking up IP cameras.The older Duffy, like his son, is a software engineer, yet he couldn't manage to get the systems working well. The cameras often had problems. One time he came home to discover his PC's hard drive was full because the software had done a bad job compressing the video.

This was mid-2008, and later that year Duffy found himself thinking out the poop problem. He had left his job as an engineer with Xobni, a tool for organizing your e-mail inbox, and was thinking of what do to next. He called Aamir Virani, a colleague at Xobni who had also left, to talk about idea of an IP camera startup.

"I told him about this idea of talking the IP camera market and making it topsy-turvy, just as Apple had done with the MP3 market," says Duffy, who's 25. "I wanted to do the same for cameras."

To his surprise, Virani understood the pain point. He used to work in his father's convenience store in Texas and recalled how bad the cameras were.

While most investors the pair approached dismissed a hardware play as too costly, Mitch Kapor, a tech pioneer and angel investor, spotted the potential. He cut Duffy and Virani a check for $250,000. They used that to help raise another $500,000 and launched the first product in early 2009.

Making a gadget, while tricky because of issues with operations and quality control, is not as costly as people think, said Duffy. He won't talk about Dropcam's financials and costs, but he stresses that it's all become within reach for startups and getting cheaper all the time.

"When you designed a hardware device 10 years ago, you almost always had to design your own core chip--your CPU--but now you can go to market with third-party chips and it's just fine," he said. (Dropcam partnered with Axis Communications, a network camera maker, to handle this and the manufacturing.)

Another example of the falling costs: Duffy said it costs about $5 to add Wi-Fi to a gadget, and the process is simple. "It's just crazy," he said.

Duffy also squeezed out expenses by ignoring stores like Best Buy. Instead, he sells only via Dropcam's Web site and on Amazon--options that even five years ago would have seemed like a trade-off not worth making.

Today, people are using Dropcam to record burglars, spot raccoons in basements, and, of course, snag dogs pooping on random yards across suburban America. "We're catching rude neighbors left and right," said Duffy.

"We in the very early days," he said. "There is still room in this world for gadgets that solves problems that cell phones can't."

About the author

Paul Sloan is editor in chief of CNET News. Before joining CNET, he had been a San Francisco-based correspondent for Fortune magazine, an editor at large for Business 2.0 magazine, and a senior producer for CNN. When his fingers aren't on a keyboard, they're usually on a guitar. Email him here.
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